ProLogis, AMB Downgraded After Merger Announcement

Fitch Ratings placed ProLogis on Rating Watch Positive, while AMB Property Corp. was placed on Rating Watch Negative. RBC Capital Markets also downgraded ProLogis from "outperform" to sector perform".

Ratings firms took a suspicious view of the announced merger of equals between industrial giants ProLogis and AMB Property Corp., downgrading both firms. Fitch Ratings placed ProLogis on Rating Watch Positive, while AMB was placed on Rating Watch Negative. RBC Capital Markets also downgraded ProLogis from “outperform” to “sector perform”.

Why the action? Fitch said it was due to the agency’s opinion that the combined entity of ProLogis and AMB will have a stronger fixed charge coverage ratio and lower leverage than ProLogis and a weaker fixed charge coverage ratio and higher leverage than AMB.

Fitch expects to resolve the ratings watches once the transaction is closed. That is slated for the second quarter of this year. It also does not take a wholly dim view of the merger, pointing out that favorable aspects include enhanced scale, a staggered debt maturity schedule, an expected smooth integration of management and a diverse customer base.

That said, Fitch argues that those aspects are offset by a sizable development platform that could adversely impact near-term liquidity along with near-term uncertainty with regard to the combined entity’s operating covenants.

Combined, the two industrial REITs are expected to have a pro forma equity market capitalization of $14 billion and total assets under management of $46 billion. It will also own and manage 598 million square feet of industrial properties across 22 countries.

Per the agreement, each ProLogis common share will convert into approximately 0.4 of a newly issued AMB common share and the firm will be structured as an umbrella partnership REIT. An all-stock merger, it is intended to be a tax-free transaction. Upon completion, the firm will be known as ProLogis and trade under the ticker symbol PLD.